Commercial Development Loans
Finance for property development generally operates as an interest-only, draw-down facility to finance development as required. Often the interest on a development loan is capitalised during the development period, with the entire loan inclusive of interest charged being repaid upon the sale of the development and or the refinance of any residual debt.
Borrowing capacity and maximum LVR for property development loans
The borrowing capacity you can achieve for development finance will vary depending on the development lending criteria you are required to meet. This will vary from lender to lender and also dependant on the proposal.
Generally speaking, Land Development Cost financing will provide up to 80% of the costs of your development, whilst GVR financing will provide up to 65 – 75%. For a full overview of your borrowing capacity, consult a commercial lending specialist.
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Finance options for property development
Land Development Cost (LDC)
Land Development Cost finance provides property developers with the funds to undertake the acquisition and construction of the development. It also includes soft costs such as architecture, engineering and interest costs.
This is the most common form of development finance and is generally limited to between 70%-80% of the overall Land Development Costs of the development project. You may be required to achieve a pre-determined level of pre-sales before finance approval will be granted.
Gross Realisable Value (GRV)
Gross Realisable Value finance provides funds based on the projected end value (excluding GST) of the property development. Under this finance method, you may be able to borrow between 65%-75% of the expected end value of the final development, potentially enabling you to fully cover both hard and soft costs without incurring any out-of-pocket expenses.
Pre-sales are often not required when using GRV finance, but it is generally used for smaller developments only (under $5.0 million).
Usually only available to experienced property developers, mezzanine finance involves the use of money from external investors rather than deposit capital from the developer or equity partners. This funding supplements senior debt (LDC and GRV funding). It traditionally involves both specialist lenders and private investors. The interest rate on a mezzanine finance facility is normally higher than other property development finance methods, and is based on a number of factors including risk.
Lender criteria for development finance
Lenders will look at a number of areas when considering if they will provide finance for a development project. These may include:
- Your experience as a property developer
- Financial strength of the property developer
- How much equity you bring to the project
- The location of your proposed development
- The profit potential of the development
- Builder experience and capacity
- Project management team experience
- Type of Development (Residential v Commercial)
- Level of pre-sales/pre-leases
- Ability to cover cost over runs
- Exit strategy
Experience can play an important role in securing finance, but if you are new to property development that doesn’t mean you won’t be able to secure funding. However, new developers may have to provide additional capital, and may not be able to borrow as much money. Depending on the lender, new developers may also need to appoint an approved and experienced project manager in order to secure suitable finance.
The more equity (deposit/capital) you can provide at the outset of a development project, the more favourably a lender is likely to view your application for development finance. A greater equity stake will reduce the risk of financing the project for the lender, as well as your overall development costs.
The location of a proposed development may play a significant part in securing property development finance. A lender will look particularly at how suited the site is to the development, and also the surrounding area in terms of population.
Part of securing finance is being able to determine the profit potential of your development project. Part of the funding process will involve a feasibility study conducted by the lender’s valuer to determine the profit margin. This step is critical in determining profitability and its acceptance to the lender.
In some cases, very specialised developments, such as for a childcare centre or motel, may attract additional conditions from the lender before finance is approved, simply because these types of developments are very specific. A more general development, such as an apartment block, may be easier to find development finance for.
The costs of property development
Depending on the scope of your project, the costs of property development and construction may include:
- Land/building acquisition costs
- Construction or refurbishment costs
- Stamp duty
- Professional/legal fees
- Architect, Engineering, Quantity Surveyor, (Specialist Consultants as required)
- Finance Costs
- Selling and Marketing Expenses
- Contingency allowance